Why the RBA Must Cut Interest Rates Now: An Economist's Perspective

The Australian economy stands at a crossroads, and the Reserve Bank of Australia (RBA) must act decisively. With interest rates at 4.35%, the cost-of-living crisis and mortgage stress are pushing many households to the brink. Delaying a cash rate cut risks exacerbating these pressures, jeopardising not only individual financial stability but also broader economic health.

The Mortgage Cliff Has Arrived

For months, economists have warned of the "mortgage cliff"—the moment fixed-rate home loans roll over from historically low rates of around 2% to variable rates exceeding 6%. This cliff is no longer theoretical. The numbers are stark: according to Finder, nearly half of younger mortgage holders now believe they over-borrowed, and one in four is skipping other essential expenses to meet their repayments.

The rise in distressed property listings further underscores the urgency of the situation. SQM Research reports an increase in homeowners forced to sell, unable to sustain the sharp rise in repayments. Canstar’s Sally Tindall has warned that many borrowers are reaching their financial limits.

A Disproportionate Burden

The RBA's reliance on interest rate adjustments as its primary tool to control inflation is inherently flawed. Less than one-third of Australian households have a mortgage, yet these households bear the brunt of rate hikes. Meanwhile, savers benefit from higher returns, paradoxically boosting their spending power and diluting the impact of rate increases on inflation.

Mortgage holders are now carrying a disproportionate share of the economic adjustment burden, with no immediate relief in sight.

Rising Costs and Limited Options

Let’s consider the numbers. The average Australian home loan size now stands at $642,121, according to ABS Lending Indicators. In 2021, a borrower with this loan would have paid $12,800 annually in interest at a 2% rate. Today, with rates averaging 6.5%, that figure has ballooned to $41,700—an additional $29,000 in yearly expenses.

This sharp increase comes alongside rising costs for everyday essentials: food, electricity, fuel, and rent. For many households, cost-cutting measures like skipping morning coffees or packing lunches were exhausted long ago.

Inflation and the RBA's Dilemma

Inflation remains stubborn, driven in large part by rising costs of necessities rather than discretionary spending. The RBA has expressed concern over Australians continuing to spend, but much of this spending is unavoidable. Rent, for instance, has surged as landlords pass on higher mortgage costs to tenants, creating a self-perpetuating cycle of inflationary pressure.

The Case for Cutting Rates

Cutting interest rates now would provide much-needed relief to struggling households, allowing them to stabilise their finances and avoid forced sales of their homes. This, in turn, could help prevent a broader downturn in the housing market, which would have far-reaching consequences for the Australian economy.

Moreover, a rate cut could temper the RBA’s credibility issue. In 2021, the central bank indicated that rates would remain low until 2024, encouraging households to borrow and spend. Many Australians took this guidance at face value. The subsequent rapid rate hikes have left them feeling betrayed and financially vulnerable.

A Timely Decision

The RBA has one final opportunity to act before Christmas, as it won’t meet again until February. The holiday season brings increased financial pressure, and for families already hanging by a thread, a delay could spell disaster.

A modest rate cut would not resolve all economic issues, but it would signal that the RBA recognises the challenges facing Australian households and is willing to take action.

A Balanced Approach

Critics may argue that cutting rates risks reigniting inflation, but this fear must be balanced against the immediate harm being inflicted on mortgage holders and the potential for a housing market collapse. The RBA must consider broader economic stability rather than relying solely on traditional inflation metrics.

The RBA’s mandate is to promote the economic prosperity and welfare of the Australian people. Right now, that welfare is under severe threat. Cutting the cash rate before Christmas is not just an option; it is an economic imperative. For thousands of Australian families, it could mean the difference between financial stability and ruin.

The time to act is now.